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Reform plans breathe new life into France
Thursday, June 29, 2017
Wealthy foreigners are returning to their favourite French haunts, driving up occupancy rates at luxury hotels and crowding into upscale restaurants and spas after a decline in the past couple of years triggered partly by terrorism concerns and labour strife. They are also putting more of their cash to work in France, lured by an improving economy, stronger corporate earnings, reviving property markets and now the prospect of genuine economic and fiscal reforms.
The shift in global equity flows back to key euro-zone markets has been under way for months - with occasional reversals stemming from worries about Italy's perilous state, messy Brexit negotiations or the latest Greek debt drama.
But only in France can investors play the reform card, thanks to the stunning presidential victory in May of independent centrist Emmanuel Macron. The 39-year-old political neophyte promised a slew of labour, administrative and other changes to tackle double-digit unemployment, boost growth and repair public finances - all while pursuing a stronger, more fiscally integrated Europe.
French equities have already benefited from the Macron effect, reaching a nine-year high after he emerged as the likely winner. The spread between benchmark French and German government bonds has narrowed. And high-net-worth investors are shopping for luxury properties in Paris, the French Alps and the Côte d'Azur, where I recently saw a flurry of construction activity.
This trend was under way before the election, but real estate agents reported that more than a few clients were making offers contingent on Mr. Macron's success.
"Buyers were holding off because the advice from most financial advisers was to wait and see," one high-end property specialist told the Financial Times. "But now that someone who seems sensible and moderate in his approach to business is in charge, people are relieved.
We have seen buyers coming back with renewed interest."
After crushing his mainstream Socialist and conservative opponents and sinking the political fortunes of far-right populist Marine Le Pen, Mr. Macron, a former investment banker, pulled off another remarkable coup in June.
His fledgling political party, La République En Marche (LREM), which didn't even exist 14 months ago, emerged with a solid majority in parliamentary elections, handing him an overwhelming mandate to pursue his ambitious agenda. The diverse LREM group is chock full of political newcomers - 47 per cent of them women - committed to revamping an increasingly unaffordable welfare state and putting the economy on a sounder footing.
The "context is ripe for genuine structural reforms," BCA Research said in a report before the legislative results.
"As a play on the reform theme, we have been long French industrial equities/short German industrial equities on a long-term horizon. The idea is that French reforms should suppress wage growth and make French exports more competitive vis-à-vis their main competitor, Germany."
On the equity side, foreign money has typically gravitated to major French industrial, consumer and financial players with lots of exposure to high-growth markets such as China. These make up the bulk of the CAC 40, France's blue-chip stock index.
That's not about to change.
Luxury goods purveyor LVMH Moët Hennessy Louis Vuitton SA, whose chief executive Bernard Arnault (estimated worth: $54-billion [U.S.]) is a staunch Macron backer, has shot up nearly 62 per cent so far this year, vaulting it ahead of oil producer Total SA as France's largest company by market cap.
LafargeHolcim, the French-Swiss building materials giant, and booze heavyweight Pernod Ricard have both climbed by about 30 per cent.
France's leading financial players have also seen major share price gains since the electoral drubbing of Ms. Le Pen's party and its anti-euro, protectionist platform. But they could be bargains if Mr. Macron's optimistic vision translates into greater domestic confidence, decent growth and increased investment at home.
Besides banks and insurers, analysts cite opportunities in such sectors as commercial real estate, telecom and technology, where smaller companies and startups could be better placed to attract outside capital.
"Macron was the candidate with the best understanding of our ecosystem," Philippe Botteri, a partner with venture capital investor Accel Partners, told Bloomberg. "Anything that helps simplify labour law in France will be beneficial."
It's hard to argue with any effort to clean up the rigid, antiquated labour code, which runs in excess of 3,000 pages - even though France's famously combative unions are bound to try.
Mr. Macron wants to hand companies the ability to negotiate wages, hours and other working conditions directly with their employees rather than being bound by rules set for their entire industry or sector.
What's more, he intends to take control of the unemployment-benefits system and 30billion ($44.5-billion) training budget away from the unions and employers, which jointly finance and operate them. The idea is to steer the money and job training where it's actually needed.
His platform also includes cutting corporate taxes, shedding 120,000 civil-service jobs, rationalizing the unwieldy public pension systems and reducing government spending to 52 per cent of GDP from 57 per cent.
Previous reform-minded French politicians have watched their careers go up in smoke over far less ambitious efforts to change hidebound rules.
Mr. Macron's beleaguered Socialist predecessor, François Hollande, managed to ram through some modest labour changes last year over the objections of his own party and after months of violent union disruptions.
(Mr. Macron quit the Hollande cabinet after his proposals were watered down.)
Today, the unions have less political leverage, after the shattered Socialists took only 29 of the 577 seats in the National Assembly with a dismal 6 per cent of the popular vote. And the hard left and right parties have largely been sent packing by voters eager to embrace a more positive outlook.
Which is why the reform card should stay in play for a while.
Boats bob in the Bay of Cannes along the Côte d'Azur.
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